Mid-year HSA Changes

It’s important to understand the rules that come with having an Health Savings Account (HSA), especially contribution limits. A health savings account (HSA) can be a great way to save money for medical expenses. It is important to understand the rules and regulations that come with having an HSA as there are limits to how much you can contribute to your HSA.

HSA Eligibility

Being eligible for an HSA means you currently have the qualifications to open and contribute to an HSA. It doesn’t mean that you already have an open account or that you can contribute indefinitely. The main factor that makes you eligible for an HSA is being enrolled in a qualified high deductible health plan (HDHP). There are a few other factors that come into play as well, so you will need to make sure you are eligible.

High Deductible Health Plan (HDHP)

An HDHP is a plan with a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but you pay more health care costs yourself before the insurance company starts to pay its share (your deductible). A high deductible plan (HDHP) can be combined with a health savings account (HSA), allowing you to pay for certain medical expenses with money free from federal taxes.

For 2024, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,600 for an individual or $3,200 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $8,050 for an individual or $16,100 for a family. (This limit doesn't apply to out-of-network services.)

Below is a chart detailing 2024 HSA-qualified health plans:

HSA eligibility typically starts on the first of a month. For example, if you enroll in a HDHP on June 15, and you meet all eligibility requirements, you will be HSA-eligible on July 1.

HSA Contribution Limits

There are a couple of factors that affect how much you can contribute to your HSA. Contribution limits for HSAs depend on your age and whether you have family or individual only coverage. Contribution limits apply to the calendar year (and tax year). The following limits are for 2022.

Mid-Year Changes in Eligibility

If you are HSA qualified all year long and have an open account, the contribution limits are pretty straightforward. However, your eligibility to make contributions to an HSA can change mid-year for many reasons. Maybe you added or dropped an HSA-qualifying high-deductible health plan (HDHP) because you started a new job, enrolled in Medicare or simply because you work for an employer whose benefits renew mid-year. As a result, you may need to prorate your HSA contribution limit. HSA contribution limits are determined on a calendar/tax-year basis. IRS rules require contribution limits be prorated by the number of months you are eligible to contribute to an HSA. Your eligibility is based on your coverage status on the first day of the month.

Basic Prorated contribution limits for 2024

Becoming Eligible Mid-Year

Becoming eligible for an HSA mid-year is a common occurrence. It may happen if your employer changes insurance plans mid-year, or if you get a new job with a different insurance plan.

HSA eligibility typically starts on the first of the month. Let’s say you got a new job with an individual HDHP and you meet all HSA eligibility requirements. You enroll in the plan on June 15, and you become HSA-eligible on July 1.

Let’s say you stay at the job all year and your insurance plan and eligibility don’t change. That means you are HSA-eligible for six months (July, August, September, October, November, and December). Your contribution amount will be prorated.

Here's how the numbers work out:
Individual Contribution Limit for 12 months = $3,850
$3,650 x 6/12 = $1925

So your contribution limit for this year will be $1,925, because you became eligible on July 1.
Your maximum amount you can contribute for this year will be $1,925, because you became eligible for an HSA on July 1.

Losing Eligibility Mid-Year

The same prorating happens if you stop being HSA-eligible mid-year. This happens often for people enrolled in Medicare coverage.

Here's a real-life example:

Let’s say you start the year with an HSA, then lose your eligibility on September 15. You were HSA-eligible for nine months of the year, including September, as you were eligible on the first day of September.

Here’s how the numbers look for an individual over the age of 55:
$3,850 x 9/12 = $2,888

Plus, you can make a $1,000 annual HSA catchup. Prorated, that is:
$1,000 x 9/12 = $750

Your total contribution limit would be $2,888 + $750 = $3,638

Temporarily Losing Eligibility

There are a few things you could do that may make you temporarily ineligible for an HSA. This includes receiving medical benefits from a Veteran’s Affairs or an Indian Health Services facility. You are not eligible to contribute to an HSA if you received medical benefits from one of these entities in the preceding three months.

For example, let’s say you had an injury and received treatment at a VA hospital on June 5. You cannot contribute to your HSA for the months of July, August, and September.

But you can contribute for June, as you were eligible on the first of the month. 

The Last Month Rule

There’s an important caveat to the info above — the “Last Month Rule” (also called the “Full Contribution Rule”). The last month rule says if you are HSA-eligible on December 1, then you can choose to contribute the full amount for the year, even if you weren’t eligible for the whole year.

The catch? There is a testing period of twelve months. This means you must stay eligible through the end of the next year, or else you will face taxes and penalties.

For example, let’s look at the individual above who became HSA-eligible on December 1. They choose to contribute the full $3,850 for the year. They must continue to be eligible all the way through December 31, 2021. If they don't, their excess contributions will be taxable and subject to a 10% penalty.

The last month rule presents an opportunity for you to weigh the risks and rewards of making a full contribution. If you foresee no change to your job or eligibility status, and you want to build up your HSA savings, then it may be the right thing for you to do. But if you are planning on changing your job or changing your coverage, then it may not be the right move.

Mid-Year Changes in Coverage Type

A prorated contribution limit also applies if the type of coverage you have changes. This happens if you switch from an individual to a family insurance plan or vice versa.

Switch from Individual to Family Coverage

Let’s say you start the year with individual coverage, then you get married. You switch to family HDHP coverage on May 15. This means you spent the first five months of the year eligible for individual contribution limits and the rest of the year eligible for family contribution limits.

Here’s how the math breaks down:
$3,850 x 5/12 = $1,604
$8,300 x 7/12 = $4,842
$1,604 + $4,842 = $6,446 total contribution limit for the year

The last month rule does apply to this situation. So if you feel confident you will remain HSA-eligible with a family plan through the last day of the next year, then you may want to contribute the full $8,300 for the year.

Switch from Family to Individual Coverage

Let’s say you switch from family coverage to individual coverage starting May 15. That means you spent five months with family coverage and seven months with individual coverage.

Here’s the math:
$8,300 x 5/12 = $3458
$3,850 x 7/12 = $2,246
$3,458 + $2,246 = $5,704 total contribution limit for the year.

Stay Informed

One of the most important things to remember about contributions to your HSA is to stay informed. Lots of people choose to contribute automatically with every payroll. Others choose to do it all in one lump sum at the end of the year. Some people choose to max out their HSA and others choose to contribute a lower amount and focus on different goals.

Contributed too much?

If you believe you’ve contributed too much to your HSA, you have until the tax deadline (typically April 15) of the following tax year to correct the error. To correct the excess contribution, you must complete an Excess Contribution and Deposit Correction Request Form, indicating the excess amount you wish to withdrawal from your HSA to comply with the contribution limits applicable to your individual tax situation. If you do not withdraw the funds by the tax deadline, you may be subject to additional taxes and penalties.